The Income Smasher: Defined Benefit & Cash Balance Plans
The Income Smasher: Defined Benefit & Cash Balance Plans
Why stop at the $69,000 401(k) limit? How high-income earners can legally stuff $300,000+ per year into a tax-deferred account and slash their current tax bill by six figures.
Executive Summary
- The Problem (Low Ceilings): For a surgeon or business owner making $1M/year, saving $69,000 in a 401(k) barely moves the needle. You are still exposed to massive income tax on the remaining $930k.
- The Solution (Cash Balance Plan): Unlike a 401(k) (Defined Contribution), a Cash Balance Plan is a **Defined Benefit (Pension) Plan**. The contribution limit is not fixed; it is determined by an actuary based on your age and income.
- The “Age” Advantage: The older you are, the more you can contribute. A 55-year-old business owner can often contribute **$300,000 – $400,000 annually** (Tax-Deductible) on top of their 401(k). This can save $150k+ in taxes instantly.
Mandatory Commitment
The Catch: A 401(k) contribution is optional (discretionary). A Cash Balance Plan contribution is Mandatory. Once you set it up, you are legally required to fund it every year for usually 3-5 years. Do not open this if your income is volatile. It is for those with steady, high cash flow.
Mechanic: The Super-Charged Deduction
$400k+
Potential Limit
Stacking
Combine w/ 401k
Tax Defer
Huge Deduction
Actuary
Required Setup
Simulation: 50-Year-Old Doctor earning $800k (Solo 401k vs. Combo)
Taxable Income Reduction
| Feature | 401(k) / Profit Sharing | Cash Balance Plan (DB) |
|---|---|---|
| Contribution Limit | ~$69,000 (Fixed Max) | $200k – $400k+ (Age Based) |
| Flexibility | Discretionary (Can skip) | Mandatory (Must fund) |
| Cost to Setup | Low / DIY | High (Requires Actuary & Admin) |
“If you are making over $500k and only using a 401(k), you are bringing a knife to a gunfight. The Cash Balance Plan is the bazooka of tax deductions for the self-employed.”
Essential Resources
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